I. Introduction
This article is concerned with the extent of a fiduciary's obligation to account for profits that have been made in breach of fiduciary duty. In particular, it responds to suggestions made recently by some senior judges that the courts ought to have a wide-ranging discretion to alter the degree to which a fiduciary must account for profits. It is well-settled that a fiduciary must account for profits that have been generated from his fiduciary position or in circumstances involving a conflict between the fiduciary's duty and his interest. The fiduciary need not account if the profit or conflict was properly authorised, in which case there was no breach of fiduciary duty. But in the absence of such authorisation, the fiduciary must account for all of the profit that has been made in breach of fiduciary duty, other than insofar as the court grants an equitable allowance to the fiduciary for work done in generating that profit. The question addressed here is whether the court ought to have a wider discretion to award an account of only part of the profits that a fiduciary has made in breach of fiduciary duty, leaving the remainder of the profits in the fiduciary's hands?
It is argued that the courts ought not to develop fiduciary doctrine so as to adopt any such discretion. A number of reasons are advanced in support of that view. A wide judicial discretion to alter the extent of the fiduciary's obligation to account for unauthorised profits would interfere with the fundamental function that fiduciary doctrine serves in protecting non-fiduciary duties from inconsistent temptations. Fiduciary doctrine adopts a strict, or full, obligation to account for profits in order to deter fiduciaries from acting in such situations. Allowing fiduciaries to believe that they might be able to retain some of their profits provided they acted in a way that the court somehow considers less egregious than other cases would distort the incentive structures by which fiduciary doctrine protects the proper performance of non-fiduciary duties. In developing that argument it is also instructive to address the cost-benefit analysis that Professor Langbein has advanced as a reason for altering fiduciary doctrine's prophylactic approach. It is argued that his analysis does not warrant any change in fiduciary doctrine's liability regime and that it therefore also should not be called in aid to support the sort of remedial discretion under consideration here.
In addition to those conceptual arguments for retaining the current position, it is important also to emphasise that there are a number of ‘pressure valves’ already built into fiduciary doctrine, which provide mechanisms whereby a fiduciary can potentially be relieved of the obligation to account for profits. The possibility of getting authorisation from the principal is well-known, but the existence of that possibility emphasises the importance of other mechanisms by which fiduciary breaches might be authorised. In particular, the article considers the extent to which courts might be able to sanction such conduct. The possibility of judicial authorisation for conduct that would otherwise be in breach of fiduciary duty has been largely overlooked in the literature. There is, however, evidence of such a jurisdiction in the case law, upon which this article will elaborate. In order to understand those cases it is important to distinguish between the award of equitable allowances, the authorisation of remuneration, and the authorisation of fiduciary conflicts generally. When these distinctions are carefully drawn, the courts' ability to authorise fiduciary conflicts can be seen to operate in a binary fashion, rather than being a free-ranging discretion to alter the degree to which a fiduciary must account for profits.
It is suggested that the purposes of fiduciary doctrine are best served by maintaining the balance currently achieved in the law: a prophylactic obligation to account fully for all profits made in breach of fiduciary duty which is tempered with the ‘pressure valves’ considered in this article. Furthermore, if the authorisation mechanisms that are identified herein are thought insufficiently streamlined, suggestions are made as to how those mechanisms could potentially be improved upon. That is preferable to introducing a judicial discretion that would undercut the incentive structure inherent in fiduciary doctrine. In other words, fiduciary doctrine already contains sufficient leeway for it to be applied fairly, bearing in mind the doctrine's purposes and the incentive structures that it seeks to create to achieve those purposes, without needing to adopt a remedial discretion of the sort that has been suggested in the recent cases.
II. The Orthodox Position and its Doubters
A fiduciary must account for profits that have not been duly authorised by his principal. As Deane J. said in Chan v. Zacharia:
a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it.Footnote 1
However, as Deane J. went on to say, “the principle is not however completely unqualified. The liability to account as a constructive trustee will not arise where the person under the fiduciary duty has been duly authorized”.Footnote 2 In such a case, there is no breach of fiduciary duty and so no obligation to account for any profit generated. Where, however, no such authorisation has been obtained, “the rule of equity is rigid. The agent [or other fiduciary] who has made a profit from his agency, without having obtained informed consent from his principal, has to account for the whole of the profit.”Footnote 3 As is well-known, the courts can make equitable allowances to fiduciaries for work done in generating the profits that were made in breach of fiduciary duty,Footnote 4 but the basic principle is that the fiduciary must account for all (although only thoseFootnote 5) profits that were made in breach of fiduciary duty.
The strictness of the fiduciary's obligation to account has been called into question in a number of forums in recent years. Some academic commentators have criticised it on the basis that it is insufficiently nuanced. For example, Professor Lowry and Mr. Edmunds have argued that the fiduciary conflict principle should take into account the nature of a company's business in order to determine whether the profit that a director has made actually was in conflict with the duty he owed to his company.Footnote 6
That is not the argument to which this article is devoted, largely because the law already has built into it the flexibility for which Lowry and Edmunds argue: it is a matter of orthodoxy that a fiduciary is only liable to account for profits if they were made in the course of his acting as a fiduciary or if there was a “real sensible possibility of conflict”Footnote 7 between the fiduciary's duty and his interest.Footnote 8 Each of those inquiries necessarily requires the courts to address the nature of the company's business, in order to identify whether the profit was made in the course of the director's acting as such and to identify what duties he might owe in the circumstances. Furthermore, the issue on which Lowry and Edmunds sought to focus was whether a breach of fiduciary duty had been committed at all. In contrast, the focus of attention in this article is the quality of the obligation to account where there has been a breach of fiduciary duty. In other words, once a breach of fiduciary duty has been made out, does the fiduciary have to account for all of the profit that he made in breach of fiduciary duty, or can that liability be reduced by the court to some lower level?
As has been mentioned already, the orthodox position is that the fiduciary must account for all of the profits that he made in breach of fiduciary duty,Footnote 9 although the court can grant equitable allowances for work done in generating those profits.Footnote 10 The question addressed here is whether the courts should allow fiduciaries to reduce their liability to account on other grounds, such as that the fiduciary acted in good faith and in the best interests of the beneficiaries? That question is not merely of academic interest. The courts themselves have raised it over the last decade. In the Supreme Court of Canada, for example, McLachlin C.J. said in her dissent in Strother v. 3464920 Canada that:
The first question is whether the remedy of account is appropriate where the breach related not to the management of the plaintiff's assets, but to an opportunity that arises to him as trustee or fiduciary. There is some doubt on this matter. It is clear that an accounting for profits is available for breach of fiduciary duty in the classic situation of the management of assets. ‘However, where the trustee's profit is not made out of the trust property but out of an opportunity that arises to him in his office as trustee […] many have questioned whether it is equitable or fair that the trust beneficiaries should have a proprietary interest in that profit (rather than a mere personal claim).’[Footnote 11] Where a fiduciary uses the plaintiff's asset to make a profit for himself, the logic of the remedy of account is clear; presumptively the profits the trustee earned would have been earned for the plaintiff, but for the breach. The plaintiff is simply claiming what is rightfully his. The link between the breach and the remedy of account is arguably less clear where the breach involves using information or an opportunity which the plaintiff would not have enjoyed in any event […] Moreover, as Hayton and others have pointed out, the effect may be to give the plaintiff priority over other creditors, should the trustee be insolvent, heightening the unfairness of the remedy of account in these circumstances.Footnote 12
If this were the only authority raising the question, it could be relatively easily dismissed because McLachlin C.J. conflated, and therefore confused, two separate issues, namely: (i) whether there should be an accounting of all profits obtained where there is a conflict, and (ii) whether the profits should also be subject to a proprietary constructive trust. The passage that McLachlin C.J. quoted from Hayton J.'s extra-curial writings was concerned with the second of those two questions,Footnote 13 whereas in her judgment McLachlin C.J. relied on his comments in connection with the first question, to which they were not addressed. Canadian law on fiduciary doctrine has also diverged to some degree from the traditional English principles.Footnote 14
But the doubts have been aired not only in Canada. The question has also been raised in England. In John Taylors v. Masons, for example, Arden L.J. commented that “it may be that in the current day and age such a rule is too harsh for modern circumstances”.Footnote 15 She left the matter there on that occasion, but four years later, in Murad v. Al-Saraj, she returned to the issue, offering more detailed comments:
It may be that the time has come when the court should revisit the operation of the inflexible rule of equity in harsh circumstances, as where the trustee has acted in perfect good faith and without any deception or concealment, and in the belief that he was acting in the best interests of the beneficiary. I need only say this: it would not be in the least impossible for a court in a future case, to determine as a question of fact whether the beneficiary would not have wanted to exploit the profit himself, or would have wanted the trustee to have acted other than in the way that the trustee in fact did act. Moreover, it would not be impossible for a modern court to conclude as a matter of policy that, without losing the deterrent effect of the rule, the harshness of it should be tempered in some circumstances. In addition, in such cases, the courts can provide a significant measure of protection for the beneficiaries by imposing on the defaulting trustee the affirmative burden of showing that those circumstances prevailed.Footnote 16
Mr Al-Saraj had made a profit in breach of fiduciary duty. He argued that he was not liable to account for the entire profit, but only for that part of his profit to which his principals would not have consented, had he sought their permission to make the profit. This argument was contrary to longstanding authority, particularly Gray v. New Augarita Porcupine Mines Ltd,Footnote 17 where the same argument had been rejected 50 years earlier by the Privy Council. In Murad, albeit without reference to Gray v. New Augarita, Arden and Jonathan Parker L.JJ. held (against Clarke L.J.'s dissent) that Al-Saraj could not reduce his liability to account in this way. But his argument provides the context to Arden L.J.'s comments about the harshness of the liability to account for all profits.
Al-Saraj was never likely to benefit from any such reduction himself as he had acted fraudulently,Footnote 18 but the question remains whether such a reduction might be made in other cases where the fiduciary acts in good faith and in the best interests of the beneficiaries. Jonathan Parker L.J. joined Arden L.J. in the result, but also in making obiter comments regarding the harshness of the extent of fiduciary doctrine's account of all profits:
there can be little doubt that the inflexibility of the ‘no conflict’ rule may, depending on the facts of any given case, work harshly so far as the fiduciary is concerned. It may be said with force that that is the inevitable and intended consequence of the deterrent nature of the rule. On the other hand, it may be said that commercial conduct which in 1874 was thought to imperil the safety of mankind may not necessarily be regarded nowadays with the same depth of concern.[Footnote 19] So, like Arden L.J. […] I can envisage the possibility that at some time in the future the House of Lords may consider that the time has come to relax the severity of the ‘no conflict’ rule to some extent in appropriate cases.Footnote 20
The observations that Arden and Jonathan Parker L.JJ. made on this point were clearly obiter, both because Al-Saraj was not a suitable candidate for any such relaxation of the rule, and because each judge recognised that any change of this sort would require a decision of (now) the Supreme Court, given the House of Lords decisions that have applied the strict approach.Footnote 21
Neither judge advanced any conceptual justification for the discretion which they mooted beyond the intuition that the strictness of the accounting obligation could work harshly, and therefore might need to be tempered, in some cases. However, an intellectually coherent justification for the doubts that they expressed could potentially be found in the cost-benefit analysis of fiduciary doctrine advanced by Professor Langbein. It is, therefore, instructive to lay out Langbein's argument at this juncture, before responding to the doubts that have been raised in the next section of the article.
Around four months before the Court of Appeal gave judgment in Murad v. Al-Saraj, Professor Langbein argued that the cost to society of the fiduciary conflict principle is too high because it prohibits transactions that are beneficial to the fiduciary's principal, as well as non-beneficial transactions.Footnote 22 In short, valuable transactions are being lost to society because of the strictness with which fiduciary doctrine is applied. In more detail, he argued that fiduciary doctrine is inefficiently costly because the presence of a conflict means that a fiduciary is prohibited from engaging in a transaction even if it would be in the best interests of the principal. In support of that conclusion, Langbein offered a cost-benefit analysis of the conflict principle which, he argued, shows that fiduciaries ought to be able to argue that a transaction was objectively in the best interests of the beneficiaries, even if the fiduciary acted with a conflict between duty and interest. To use his own words, Langbein argued that the:
preoccupation with prophylaxis follows naturally enough from the two suspect assumptions […] that when a trustee has a conflict it must be harmful to trust beneficiaries, and that a conflicted trustee can easily conceal wrongdoing […] The counterargument, of course, is that in cost-benefit terms, the value of beneficiary-regarding conduct now foreclosed under the sole interest rule outweighs any losses that might arise from changing the force of the presumption of wrongdoing from conclusive to rebuttable.Footnote 23
Strictly speaking, if Langbein's argument were accepted it would provide the fiduciary with a full defence to a claim for breach of fiduciary duty, rather than giving courts a discretion as to what proportion of the fiduciary's profits ought to be made the subject of his obligation to account. However, the cost-benefit analysis could potentially be used to support either of those approaches, and Langbein's is the most sophisticated cost-benefit analysis of the fiduciary conflict principle that has been offered to date. In that sense, it is relevant to the question addressed in this article: if allowed to go unchecked, Langbein's analysis could plausibly be used to provide a coherent intellectual underpinning for doubts of the sort raised by the judges in Strother and Murad v. Al-Saraj about the extent of fiduciary doctrine's obligation to account for profits. In order to prevent those doubts gaining traction, the next section of the article offers a positive conceptual justification for the strictness of fiduciary doctrine's accounting obligation and defends that justification against the cost-benefit analysis proffered by Professor Langbein.
III. Responding to the Doubts
It is commonplace to observe that equitable remedies are discretionary, which might be thought to justify the discretion mooted by the judges in Murad and Strother. However, the court's discretion as to the grant of equitable remedies is to be exercised according to established principle.Footnote 24 As has been seen, the orthodox principle regarding a fiduciary's obligation to account for profits made in breach of fiduciary duty is that the account covers all of the profits that were made in breach of fiduciary duty, unless an equitable allowance is appropriate. The question that the dicta in Murad and Strother raise is, therefore, this: should the Supreme Court be prepared to countenance the relaxation of fiduciary doctrine's strict obligation to account for all of the profits that a fiduciary has been found to have made in breach of fiduciary duty?
The suggestion advanced in this article is that the law should not change in that way. Both positive and negative reasons are offered in support of that position: the article presents a positive justification for the current state of the law, notwithstanding its apparently harsh consequences, as well as a defence of that position against the case for change made in Professor Langbein's cost-benefit analysis. The two sides of the argument are inter-twined, in that the positive justification provides part of the response to Langbein's analysis.
A. Positive Justification
The positive justification for the current position is based on the view that the fundamental purpose of fiduciary duties is to provide a subsidiary and prophylactic form of protection for non-fiduciary duties. Fiduciary doctrine is strict in order to provide that protection for non-fiduciary duties.
The view that fiduciary doctrine provides a subsidiary and prophylactic form of protection for non-fiduciary duties cannot be defended in full within the confines of an article such as this, but a skeleton of the argument can be presented.Footnote 25 Fiduciary doctrine is based on a fundamentally cynical view of human nature. “Taking mankind at large, it is not very safe to allow a man to put his private interest in conflict with the duty which he owes to another.”Footnote 26 As Lord Herschell recognised over a hundred years ago, “human nature being what it is, there is danger […] of the person holding the fiduciary position being swayed by interest rather than by duty”.Footnote 27 The importance of this is that inconsistent temptations create a risk of non-fiduciary duties being breached. It is that risk at which fiduciary doctrine strikes. Fiduciary doctrine seeks to force fiduciaries to avoid acting in situations where that risk exists because the temptations heighten the risk that the fiduciary will act in breach of his non-fiduciary duties. Fiduciary doctrine thus protects the proper performance of non-fiduciary duties.Footnote 28 Its protective function means that it occupies a subsidiary position vis-à-vis those non-fiduciary duties.Footnote 29 Fiduciary doctrine also offers a prophylactic form of protection for non-fiduciary duties in the sense that the fact of a fiduciary acting with a conflict between (non-fiduciary) duty and interest suffices to make out a breach of fiduciary duty, without any need to show that the non-fiduciary duty has been breached. Thus, for example, a fiduciary can act in breach of fiduciary duty (triggering the obligation to account for any profits made) even if his conduct has been for the benefit of those to whom he owed the fiduciary duties.Footnote 30 The normative justification for fiduciary doctrine is the avoidance of situations which involve a risk of breach of non-fiduciary duties: the concern is that the fiduciary's interest might sway him away from proper performance of his non-fiduciary duties. “The rule is a rule to protect directors, trustees and others against the fallibility of human nature.”Footnote 31
The purpose of imposing a strict obligation to account for all profits made out of a situation involving a conflict between duty and interest is to deter fiduciaries from acting in such situations. By making it clear that a fiduciary will lose his profits if he acts in such a situation, the incentive to act is removed (or at least reducedFootnote 32) and the fiduciary is deterred from acting in a situation where there is temptation to breach his non-fiduciary duties: “the rule is so to speak, good for discipline: [it is] calculated to deter agents from behaving in that way.”Footnote 33 This deterrence function is well-established in the cases: “equity imposes stringent liability on a fiduciary as a deterrent – pour encourager les autres”.Footnote 34 As Heydon J.A. remarked in Harris v. Digital Pulse:
the height and strictness of the standards protect the principals of fiduciaries by nullifying temptation. In that sense they deter fiduciaries from drifting into a position of conflict, or worse. […] The remedy of account of profits to capture unlawful gains […] can have a deterrent effect, because it tends to make the unlawful conduct in question futile.Footnote 35
Some commentators have criticised this deterrent understanding of fiduciary doctrine's profit-stripping regime on the basis that merely removing the defendant's profit has no real deterrent effect because the defendant is no worse off than he was before he entered into the transaction in breach of fiduciary duty.Footnote 36 But a fiduciary can often be left worse off after profit-stripping remedies have been applied. First, if the fiduciary is given no allowance for skill and effort expended in generating the profit, the fiduciary is worse off to the extent of his uncompensated labour costs in producing the profit.Footnote 37 Secondly, any negative reputational effect which the successful claim for breach of fiduciary duty has is not recouped in the accounting process.Footnote 38 Thirdly, an account of profits can place the defendant in a position worse than that he would have occupied had he acted properly because the entire profit is stripped irrespective of whether the principal would have been prepared to authorise the fiduciary to take part of the profit (for example, in a profit-sharing arrangement) had the fiduciary made full disclosure and sought the principal's fully informed consent.Footnote 39
While perfect disgorgement may not provide the same degree of deterrence as could be achieved by a penalty, fiduciary doctrine's remedies have been exportedFootnote 40 from the trust context where Anglo-Australian equitable doctrine traditionally set its face against punitive action.Footnote 41 The policy underlying the fiduciary conflict principle is to discourage fiduciaries from acting in situations that carry a heightened risk of breach of non-fiduciary duties. Fiduciary doctrine's profit-stripping remedies may give effect to that deterrent only imperfectly, but they do so as fully as possible within the constraints of traditional equitable doctrine in the absence of statutory intervention.
The importance of this deterrent understanding of fiduciary doctrine's strict profit-stripping regime is that if courts are prepared to hear arguments from a fiduciary in favour of reducing the proportion of the profits for which he has to account on the basis that he acted objectively in the best interests of the principal, or that he honestly believed that he was so acting, this does nothing to reduce the temptation that fiduciaries face where there is a conflict between duty and interest. In fact, judicial preparedness to entertain such arguments would increase the temptation that a fiduciary faces. As Heydon J.A. observed in Harris v. Digital Pulse, “the temptation might be assisted if the fiduciary had in contemplation the possibility of escaping liability by arguing that the principal was caused no loss, or that the profit made was never available to the principal”.Footnote 42 The same “assistance” – or increase – in temptation arises if the fiduciary has in mind the possibility of escaping liability by relying on a judicial discretion where he is acting in what he honestly believes to be the best interests of his principal. Allowing fiduciaries to argue that they have not in fact succumbed to such temptations increases the temptation that they face, by making the possibility of personal profit more accessible.
As Professor Flannigan has said, “particularly where they are sophisticated, fiduciaries are able to structure and document intentions, events, and opportunities so as to erect a façade of regularity. Where they do so effectively, ex ante or ex post, others will not perceive or comprehend the operation of their self-interest.”Footnote 43 The temptation to act in that way decreases the effectiveness of fiduciary doctrine's protection of the proper performance of non-fiduciary duties, because the very point of the doctrine is to reduce the level of temptation that fiduciaries face.
In other words, if the courts allow fiduciaries to argue that they should not have to account fully because they acted objectively in the principal's best interests, that creates an incentive for fiduciaries to try to contrive situations where that appears to be the case. Creating an incentive of that sort subverts, rather than advances, the protective function that fiduciary doctrine is designed to serve. And that subversion only gets worse if the courts are prepared to hear arguments that the fiduciary should face a reduced liability to account because he honestly believed that he was acting in the principal's best interests.
The strictness – or fullness – of fiduciary doctrine's profit-stripping remedies is part of the means by which it deters fiduciaries from acting in situations involving conflicting interests. That makes the proper performance of non-fiduciary duties more likely. Allowing a fiduciary to argue that an impugned transaction was nonetheless in the best interests of his principal, notwithstanding that there was a conflict between duty and interest, undermines that protection by creating an incentive for fiduciaries to seek to engineer situations in which they could make such an argument. It undermines the fundamentally protective function of fiduciary doctrine for courts to be willing to hear such arguments.
In sum, the positive justification for the current state of the law is that a fiduciary must account for all profits that have been made in breach of fiduciary duty in order to deter fiduciaries from acting in situations where a conflicting interest creates a temptation not to perform their duties properly. That temptation is increased (not decreased) if the fiduciary thinks that he might be able to act and retain part of the profit provided he honestly believes that he is doing the right thing. Any increase in temptation is directly contrary to what fiduciary doctrine is designed to achieve.
B. Defending the Current Position
As has been foreshadowed already, this section of the article sets out to defend the orthodox position against Professor Langbein's cost-benefit argument against the strictness of fiduciary doctrine.Footnote 44
The first point to make is that, contrary to what Langbein says,Footnote 45 the justification for the fiduciary conflict principle does not lie in the idea that allowing a fiduciary to act with a conflict between duty and interest ‘must’ be harmful to the principal. Rather, the point is that there is a risk that a fiduciary faced with such a conflict ‘might’ act in a way that is prejudicial to the principal.Footnote 46 It is that risk that is the target at which fiduciary doctrine is aimed – not the idea that there is always harm where there is a conflict between duty and interest.
Secondly, and more importantly, Langbein's assessment of the cost of fiduciary doctrine does not take sufficient account of the fiduciary's ability to gain absolution from the obligation to account by obtaining authorisation for such conduct. Langbein argues that the conflict principle imposes a high cost because its absolute terms prohibit much conduct that would be beneficial to beneficiaries. But that cost is considerably lower than he posits if one bears in mind the possibility for the fiduciary to be authorised to engage in such conduct. Such authorisation can come from the arrangement that constituted the fiduciary relationship, such as the trust instrument or a company's articles of association, or from a court,Footnote 47 or by obtaining the fully informed consent of the fiduciary's principal (or principals).
Langbein does, of course, recognise that these possibilities exist, but he argues that they support his position: he considers that the exceptions had to be created because of the unacceptably high costs that the conflict principle generates for society, and so they show that we cannot continue to treat the conflict principle as the baseline norm.Footnote 48
The difficulty with this argument is that the exceptions are part of the relevant ‘baseline norm’ for the purposes of conducting a cost-benefit analysis to determine whether the rule needs to be changed, because it is well-recognised that “the rule … is one essentially for the protection of the person to whom the duty is owed [and so] the person entitled to the benefit of the rule may relax it”.Footnote 49 As Lord Normand said in Dale v. Inland Revenue Commissioners, “the rule […] is not that reward for services is repugnant to the fiduciary duty, but that he who has the duty shall not take any secret remuneration or any financial benefit not authorized by the law, or by his contract, or by the trust deed under which he acts, as the case may be”.Footnote 50 In other words, the fiduciary principle is that a fiduciary cannot act where his personal interest conflicts with his duty unless that has been properly authorised.
The reason why the law permits the rule to be relaxed is obvious. […] Directors, trustees or solicitors may sometimes be placed in such a position that though their interest and duty conflict, they can properly and honestly give their services to both sides and serve two masters to the great advantage of both. If the person entitled to the benefit of the rule is content with that position and understands what are his rights in the matter, there is no reason why he should not relax the rule, and it may be very much to his advantage to do so.Footnote 51
In other words, the law permits the rule to be relaxed for the same reason that any other party to whom a legal duty is owed is able to waive performance of that duty: in recognition of the autonomy of the principal, rather than because the doctrine is seen to cause inefficient harm to society.
The point that matters most here is that “no great hardship is imposed on [fiduciaries] by enforcement of the rule, as a very simple course is available to them which they may follow”Footnote 52: the fiduciary can avoid the constraining effect of the conflict principle by getting consent at the outsetFootnote 53 (in the trust deed or other relevant documentation) or, if that was not done, by getting consent from his principal (trust beneficiaries or others), or by getting authorisation from the court. The true cost of the conflict principle, therefore, lies in those cases where none of those forms of authorisation can be obtained, or they can only be obtained at very high cost.
It is important to make clear here that it is not denied that there is a cost inherent in the application of the fiduciary conflict principle: the conflict principle does create a relevant cost because it prohibits a fiduciary from entering into some transactions which would be in his principal's best interests. The point that matters is that the “cost” side of the cost-benefit analysis must recognise that the conflict principle is not a blanket prohibition. It is a general prohibition that recognises important exceptions. Only when those exceptions are taken into account, can one determine the true cost of the principle in order to conduct a cost-benefit analysis of it.
Therefore, on the “cost” side of the cost-benefit analysis, the cost is not as high as Langbein suggests. The “benefit” side of the cost-benefit analysis is the protection that fiduciary doctrine provides to non-fiduciary duties. As has been explained already, fiduciary doctrine makes the proper performance of non-fiduciary duties more likely by requiring fiduciaries to avoid acting in situations where conflicting interests create a risk that there will not be proper performance of those duties.Footnote 54
Weighing that “benefit” against the “cost” of the doctrine is not a straightforward matter, but it is suggested that the balance does not require a change of the sort mooted by the judges in Murad v. Al-Saraj and Strother. Fiduciary doctrine's strict obligation to account for profits is a deterrent against acting in situations that involve conflict between duty and interest. Fiduciary doctrine adopts that deterrent position because human nature is such that there is a risk that the fiduciary will be tempted to follow his own interest rather than properly perform his duty. It seems accurate to say, as Jonathan Parker L.J. did in Murad,Footnote 55 that the nature of commercial activity has changed since 1874. But there is no reason to think that human nature has changed since then. The risks that temptation creates remain ever present. Recent events in the economies of Britain and the United States (indeed, around the globe) hardly provide any cause for complacency in that regard. As Arden L.J. herself said in Lindsley v. Woodfull, judgment in which was delivered only a year before Murad v. Al-Saraj, “the facts of this case do not suggest that the need for this deterrent has diminished since the eighteenth century”.Footnote 56
This view is further reinforced if one adopts the position, advanced by law and economics scholars, that fiduciary duties are default terms in contracts. The raw view that fiduciary duties “are no more or less than contractual implied terms”Footnote 57 and “the same sort of obligations […] as other contractual undertakings”,Footnote 58 is problematic as a description of fiduciary doctrine,Footnote 59 but an alternative version of contractarian theory is more compelling. According to this alternative version, fiduciary duties are “penalty default” rules, which “are designed to give at least one party to the contract an incentive to contract around the default rule […] penalty defaults are purposefully set at what the parties would not want – in order to encourage the parties to reveal information to each other.”Footnote 60 A penalty default analysis of fiduciary doctrine sees the doctrine as having been designed so that fiduciaries will disclose relevant information to their principals in the process of seeking fully informed consent in order to release themselves from the harsh consequences of the conflict principle. Penalty default analysis does not accurately describe the reasons that the courts had for designing fiduciary doctrine as they did,Footnote 61 but it does provide a reasonable description of the functional effects of that doctrine.Footnote 62 The point that matters to the present analysis is that a change in the doctrine such as that suggested by the judges in Murad v. Al-Saraj and Strother would wreak havoc with the incentive structure that, according to penalty default analysis, fiduciary doctrine is supposed to provide: the incentive to make full disclosure in order to obtain fully informed consent would be drastically undermined if a fiduciary knew that he had a good chance of retaining some of his profits without making such disclosure, provided he was acting in good faith.
Professor Langbein's cost-benefit analysis fails to make out a sufficient case for altering fiduciary doctrine's liability regime. More importantly in the context of the question under consideration here, but for the same reasons, it ought not to be relied upon to lend intellectual vigour to the suggestions made by the judges in Murad and Strother regarding the adoption of a remedial discretion in fiduciary accounting cases.
IV. The Importance of Authorisation Mechanisms
The previous section emphasised the importance of the various mechanisms by which a fiduciary can obtain authorisation for what would otherwise constitute a breach of fiduciary duty. It is suggested that the debate should not be about the idea of relaxing the stringency of fiduciary doctrine's accounting obligation, but rather should focus on the question whether the existing mechanisms for getting authorisation are sufficient: if existing mechanisms are sufficient then there is no good reason for the courts to weaken the deterrent message sent by fiduciary doctrine's strict obligation to account for profits. That question raises a number of issues which have not been considered in much detail in either the cases or the academic literature regarding fiduciary doctrine. In particular, it focuses attention on whether the court has jurisdiction to sanction conflicts between duty and interest, and on the ease with which that jurisdiction may be called into action.
A. Court's Jurisdiction
The answer to the question whether the existing mechanisms for getting authorisation for a fiduciary conflict are sufficient seems likely to depend on whether one considers an individual case or a general assessment of the doctrine overall. A general assessment seems likely to conclude that the law is sufficient, because it is very easy for authorisation to be included at the outset in the trust instrument (or equivalent constitutive documentation) or, if not authorisation, then at least a simple mechanism for gaining authorisation from other non-conflicted fiduciaries. And even if it was not obtained at the outset, authorisation can easily be obtained later where there are only a few principals from whom to get fully informed consent. The difficulty lies in individual cases where no authorisation was obtained at the outset and where it is not feasible to get it from the principals: for example, if there are too many beneficiaries who are too diffuse (or not yet born) for fully informed consent to be a realistic possibility. In such cases, attention falls on the court approval process: is the procedure for getting court authorisation sufficiently streamlined to deal with these cases?
However, before that question can be considered, the source of the court's jurisdiction to sanction fiduciary conflicts must be addressed. That issue, in particular, has received scant attention in the literature, and the cases affecting it are far from a model of clarity. For example, in Guinness plc v. Saunders, Lord Templeman (with the agreement of Lord Keith, Lord Brandon and Lord Griffiths) considered that a director could not be given remuneration for his work in arranging a takeover of another company because “equity has no power to relax its own strict rule further than and inconsistently with the express relaxation contained in the articles of association. A shareholder is entitled to compliance with the articles.”Footnote 63 In contrast, Lord Goff (with the agreement, again, of Lord Griffiths) expressed the view that:
directors are not entitled to remuneration for their services as directors except as provided by the articles of association. Plainly, it would be inconsistent with this long-established principle to award remuneration in such circumstances as of right on the basis of a quantum meruit claim. But the principle does not altogether exclude the possibility that an equitable allowance might be made in respect of services rendered.Footnote 64
None of the Lords considered remuneration to be justified in Guinness v. Saunders, and so the disparity of view over the jurisdiction to award it did not need to be resolved.
A wider review of the cases does not provide a clear answer to this question, although it suggests that a judicial jurisdiction to sanction fiduciary conflicts has been exercised in a number of cases. For instance, notwithstanding clear statements that trustees ought to act without remuneration,Footnote 65 there are numerous instances of courts awarding,Footnote 66 or at least recognising their ability in appropriate cases to award,Footnote 67 remuneration to trustees for the work that they have done in promoting the interests of the beneficiaries of the trust. This involves a limited court sanction for what would otherwise be a conflict between duty and interest.Footnote 68 This has been held not to amount to a change in the terms of the will or trust,Footnote 69 which remains outside the court's jurisdiction.Footnote 70 Similarly, the courts have recognised a jurisdiction to remunerate liquidators out of assets held on trust by the liquidated company for work done in realising those assets.Footnote 71
However, on their own these cases do not establish a general judicial jurisdiction to sanction conduct that would otherwise be prohibited by fiduciary doctrine because, although the relationship between trustee and beneficiary is the paradigm fiduciary relationship,Footnote 72 “the ability of trustees to make such applications [for directions] derives from the peculiar relationship of trusts to the Court of Chancery and is no doubt founded in the jurisdiction of this court in an appropriate case itself to execute a trust”.Footnote 73 In other words, the basis of the jurisdiction is the court's inherent jurisdiction to control the administration of trusts: “when the court authorises payment of remuneration to trustees under its inherent jurisdiction it is […] exercising its ancient jurisdiction to secure the competent administration of the trust property”.Footnote 74 That is also the conceptual basis underlying the liquidator cases mentioned above, where the jurisdiction to remunerate was founded on the courts' jurisdiction to insist that remuneration be paid where that is necessary to secure the good administration of trust assets,Footnote 75 or assets held for the benefit of others.Footnote 76 These cases therefore provide little guidance regarding fiduciaries more broadly.
That does not mean that there is not a broader jurisdiction, but such a jurisdiction cannot be proven simply by pointing to the trustee remuneration cases. In other words, one must distinguish cases where the court authorises remuneration to trustees under its inherent jurisdiction from other cases where the court authorises conduct that would otherwise be in breach of fiduciary duty. Authorisation of a trustee's remuneration does authorise conduct that involves a conflict between duty and interest, but the jurisdiction to do so is fundamentally concerned with ensuring that the trust is run adequately by paying for its proper administration. It is not any form of implied contract for remuneration.Footnote 77 It is part of the court's inherent jurisdiction over trusts rather than a broader jurisdiction to authorise remuneration to fiduciaries generally. Thus, for example, the jurisdiction would not apply were a partner to seek to be paid, for work wholly unrelated to any trust, something other than what had been agreed in the partnership agreement. It is worthwhile, therefore, separating the court's jurisdiction to authorise conduct that would otherwise be a breach of fiduciary duty from the (overlapping) jurisdiction to authorise remuneration for trustees (or others managing trust assets). It is the general fiduciary jurisdiction, if it exists, that is of most importance to the analysis here.
In that respect, the courts have sanctioned,Footnote 78 or recognised the ability to sanction,Footnote 79 purchases by trustees of the trust property. In other words, the court does have jurisdiction to sanction other conduct by trustees which fiduciary doctrine would otherwise prohibit.Footnote 80 And, importantly, there is evidence in the cases of a general jurisdiction of that sort being exercised by the courts, even outside of trustee cases. For example, in Popham v. Exham, Smith M.R. observed that a person who has the carriage of proceedings in a court-ordered sale cannot purchase because “he stands in a fiduciary position to all the parties”,Footnote 81 but that the court can give such a person liberty to bid (provided the carriage of the proceedings is given to another).Footnote 82 Again, it might be objected that this is not clear evidence of a general judicial jurisdiction to sanction fiduciary conflicts, because the context is a court-ordered sale, and one would expect the court to have discretionary control over the conduct of such a sale. However, the justification given for the prohibition on purchase was the fiduciary position held, and the court recognised a jurisdiction to sanction such conduct nonetheless.
Similarly, in Boardman v. Phipps, an equitable allowance was given to a solicitor/agent who was not a trustee. However, the solicitor was held liable for breach of the fiduciary duties that he owed to the trustees and beneficiaries for whom he was working, and so the allowance could potentially (albeit somewhat loosely) be considered to have been granted in connection with the administration of a trust. Indeed, Wilberforce J. justified the allowance at first instance on the basis that it would be inequitable for the plaintiff to take the profit without paying for the skill and labour that produced it, but also noted that, had they sought it, the trustees would in all probability have been granted permission to employ someone in the defendant's position.Footnote 83 On appeal, Lord Denning M.R. purported to recognise the jurisdiction to award allowances on the inequity basis, without reference to the trustees,Footnote 84 although the question of allowances had not been argued as a matter of principle because the plaintiff accepted that one was appropriate.Footnote 85 The House of Lords did not address the juristic basis for the allowance in any detail.Footnote 86
The courts have also given allowances, and sanctioned conduct that would otherwise be prohibited by fiduciary doctrine, in other cases. When partnerships are dissolved, for example, the courts have a discretionary power in taking an account of the profit that has been made to award an allowance to the remaining partners for their work in generating post-dissolution profits.Footnote 87 Fiduciaries have also been awarded allowances by the Court of Appeal in O'Sullivan v. Management Agency & Music Ltd.,Footnote 88 by the High Court of Australia in Warman International Ltd. v. Dwyer,Footnote 89 and the possibility was recognised by the Court of Appeal in Murad v. Al-Saraj.Footnote 90 Vos J. also recently held that an agent was entitled to an allowance for the work it did in securing a profit for which it had to account to its principal, the profit having been taken by the agent without authorisation and thus in breach of fiduciary duty.Footnote 91 None of these cases involved trusts or court-ordered sales.
And in Brown v. Litton, decided in 1711, a ship's mate was held liable to account for profits that he made when he used property belonging to the captain, who had died during the voyage.Footnote 92 The defendant appears not to have been treated as a formal trustee of the property, but Harcourt L.K. held that he was “more like a trustee than an executor, and if so, he ought clearly to account for the profits made of the money […] But that, to recompense the defendant for his care in trading with it, the Master should settle a proper salary for the pains and trouble he had been at in the management thereof.”Footnote 93
The condition of the authorities means that one cannot state categorically that the court has jurisdiction to sanction what would otherwise be a breach of fiduciary duty in all cases, but there is high level authority in support of the existence of such a jurisdiction. The jurisdiction clearly exists in trust cases, as part of the court's inherent jurisdiction to administer trusts, but there is evidence of it having been applied more broadly than that, in court-ordered sales and partnership cases, and in individual cases involving other kinds of fiduciaries.
Putting to one side the trustee remuneration cases, for the reasons already discussed, the other cases seem to fall into two categories. One category comprises cases, such as where the court permits a fiduciary to buy property that is subject to the fiduciary relationship, where the court sanctions what would otherwise constitute a breach of fiduciary duty. Here, the court's jurisdiction operates in a binary fashion: the conflict is either authorised or it is not. If it is, then no breach of fiduciary duty is committed. The other category comprises cases where equitable allowances are made to fiduciaries who have acted in breach of fiduciary duty. Here the conflict is not sanctioned (or the fiduciary would not have to account at all, as in the first category) but the fiduciary is allowed some payment for work done in generating the profit for which he must now account.
Where equitable allowances are awarded, they are sometimes calculated by reference to a share of the profits that have been made.Footnote 94 Even so, it is suggested that allowances are best conceived of as the court remunerating the fiduciary for the work that has generated the profit rather than as the court imposing what it considers to be an equitable division of the profits between fiduciary and principal. In other words, where allowances are made to the fiduciary, these are best understood as being in the nature of a court-authorised expense which reduces the net profit for which the fiduciary must account,Footnote 95 rather than a partial profit-sharing arrangement imposed by the court on the fiduciary and principal.
The existence of a general jurisdiction, over fiduciaries broadly rather than just trustees, to sanction conduct that would otherwise be a breach of fiduciary duty is unsurprising when one considers the traditional function that the fiduciary concept served of “exporting incidents of the express trust by analogy”Footnote 96 to other similar situations. “Fiduciary duties are equitable extensions of trustee duties”Footnote 97 and the “fiduciary relationship has developed by analogy from the trust relationship”.Footnote 98 As Fry J. said in Re West of England & South Wales District Bank:
What is a fiduciary relationship? It is one in respect of which if a wrong arise, the same remedy exists against the wrong-doer on behalf of the principal as would exist against a trustee on behalf of the cestui que trust.Footnote 99
Thus, for example, describing the position of directors, Kay L.J. said in Re Lands Allotment Co.:
case after case has decided that directors of trading companies are not for all purposes trustees or in the position of trustees, or quasi trustees, or to be treated as trustees in every sense; but if they deal with the funds of a company, although those funds are not absolutely vested in them, but funds which are under their control, and deal with those funds in a manner which is beyond their powers, then as to that dealing they are treated as having committed a breach of trust.Footnote 100
It is entirely understandable for the courts to have concluded that if a person is to be held to duties analogous to those owed by a trustee, because the person occupies a position similar to that of a trustee, then the person ought also to be able to be relieved of that liability in circumstances where a court would sanction the conduct had it been that of a trustee.
However, it is to be emphasised that, as is the case with trustees, the “jurisdiction should only be exercised sparingly, and in exceptional cases”.Footnote 101 As the Court of Appeal observed in Re New, “the jurisdiction is one to be exercised with great caution”,Footnote 102 and as Lord FitzGerald said in Coaks v. Boswell, speaking of an order giving a solicitor liberty to purchase, “the making of such an order ought to be rare and exceptional”.Footnote 103 Such orders are only sparingly made because they undermine the deterrent function of the fiduciary conflict principle. Thus, “the exercise of the jurisdiction is restricted to those cases where it cannot have the effect of encouraging trustees [or other fiduciaries] in any way to put themselves in a position where their interests conflict with their duties as trustees”.Footnote 104 This approach preserves the deterrent incentive structure that fiduciary doctrine generates.
“It is impossible, and no attempt ought to be made, to state or define all the circumstances under which, or the extent to which, the Court will exercise the jurisdiction”,Footnote 105 but it is noteworthy that it is often resorted to when the beneficiaries are minors or unborn.Footnote 106 Further, if adult principals object to the fiduciary's conduct then the court is far less likely to accede to the fiduciary's request for it to be sanctioned.Footnote 107
The courts also seem more amenable towards such applications where the request is made before the infringing transaction has taken place, as opposed to applications made ex post facto. The cases regarding trustees are again instructive in this regard. Notwithstanding indications in some cases that “a special case must be made […] before the trust is accepted”,Footnote 108 several cases show that the courts are prepared to consider, for example, the award of remuneration after the trustee has done the work for which he seeks it, as well as beforehand.Footnote 109 However, in these cases the fiduciary sought approval from the court before taking remuneration, and so the sanction was in effect given before a conflict arose. In cases where the fiduciary has taken remuneration without sanction, and has then sought to justify that conduct ex post facto when it has been challenged, the courts have been far less sympathetic and have often disallowed the remuneration without even being prepared to consider whether it ought to be sanctioned.Footnote 110
For similar reasons, courts ought to be wary about exercising statutory jurisdictions to relieve fiduciaries from their liability to account for profits. In Sinclair v. Sinclair, Proudman J. denied that the statutory jurisdiction to relieve trustees from liability under section 61 of the Trustee Act 1925 even applied in cases involving accounting for benefits retained, as distinct from compensating for losses consequent upon a breach of trust.Footnote 111 However, she did so without reference to the contrary conclusion reached by H.H.J. Reid Q.C., in Coleman Taymar Ltd. v. Oakes, regarding the comparable statutory jurisdiction to relieve company directors.Footnote 112 Assuming that such statutory provisions could potentially be used in cases where an account of profits is sought, as distinct from cases involving liability to compensate for loss, they ought to be used very cautiously in the profit-stripping context. Statutory relief provisions of this sort may be “extremely beneficial”Footnote 113 in some cases where they apply,Footnote 114 but they also “interfere with well-established doctrines”Footnote 115 and:
were never meant to be used as a sort of general indemnity clause for honest men who neglect their duty, and if it were so applied as to shake or weaken the clear rules of the Court in reference to the conduct of trust matters, it would, I believe, result in greater evils than those it was intended to remedy.Footnote 116
In Re Pauling's Settlement Trusts, the Court of Appeal commented on the advisability of granting relief under section 61 of the Trustee Act 1925 where a trustee has placed himself in a position involving a conflict between duty and interest, making it clear that “the court should be very slow to relieve such a trustee under the provisions of the section”.Footnote 117 Given the prophylactic and deterrent policy underlying fiduciary doctrine's profit-stripping remedies, it is suggested that this is the correct attitude for the courts to adopt towards such provisions, which ought to be exercised cautiously in order not to give any encouragement to fiduciaries to act with conflicts between duty and interest.Footnote 118
B. Sufficiency of the Jurisdiction
The question that remains, if the court's jurisdiction to sanction conduct that would otherwise breach the fiduciary conflict principle is accepted, is whether that jurisdiction is sufficient to allay concerns about the fullness of the obligation to account for all profits made in breach of fiduciary duty.
That question is difficult to answer, as it is concerned primarily with the practical implementation of the jurisdiction, which is far more the province of practitioners than academic commentators. That difficulty is compounded by the fact that the court's jurisdiction to sanction conduct by trustees that is not otherwise authorised “has been constantly exercised, chiefly at chambers”.Footnote 119 Consequently, the courts' decisions on such applications tend not to be reported,Footnote 120 which makes it difficult for anyone other than practitioners (including, for these purposes, judges) to assess the sufficiency of the jurisdiction.
Unscientific enquiries made of practitioners by the author suggest that there would be little procedural difficulty in making such an application and that the courts would be likely to be amenable to dealing with it quickly if necessary, provided the beneficiaries were appropriately notified and represented. The speed with which such an application is capable of being addressed is important if the jurisdiction is to remain useful. As the Court of Appeal observed in Re New:
In the management of a trust estate, and especially where that estate consists of a business or shares in a mercantile company, it not infrequently happens that some peculiar state of circumstances arises for which provision is not expressly made by the trust instrument, and which renders it most desirable, and it may be even essential, for the benefit of the estate and in the interest of all the cestuis que trust, that certain acts should be done by the trustees which in ordinary circumstances they would have no power to do. In a case of this kind, which may reasonably be supposed to be one not foreseen or anticipated by the author of the trust, where the trustees are embarrassed by the emergency that has arisen and the duty cast upon them to do what is best for the estate, and the consent of all the beneficiaries cannot be obtained by reason of some of them not being sui juris or in existence, then it may be right for the Court, and the Court in a proper case would have jurisdiction, to sanction on behalf of all concerned such acts on behalf of the trustees as we have above referred to.Footnote 121
One means of ensuring that decisions can be made quickly is to follow a court procedure like that contained in section 48 of the Administration of Justice Act 1985, under which the court can make an order regarding the construction of a will or trust without a hearing in uncontested cases where the trustees have obtained an opinion from someone with 10 years High Court standing. Following recommendations made by the Trust Law Committee,Footnote 122 a power akin to section 48 has been inserted into the Civil Procedure Rules, pursuant to which the court can approve a transaction, including one which involves a conflict between duty and interest or between duties, without a hearing.Footnote 123 An application for such approval must, like a section 48 application, be accompanied by advice on the merits of the claim from a lawyer with a 10-year High Court qualification.Footnote 124 This jurisdiction has been in effect since 1 October 2009, and reports from practitioners suggest that the procedure is being used successfully.
If the court procedure is considered too cumbersome to deal effectively with the need for authorisation where it cannot be obtained from the fiduciary's principals, an alternative solution would be to legislate for a default authorisation mechanism, allowing non-conflicted fiduciaries to authorise the relevant transaction. The default could either be drafted on an ‘opt-out’ basis, like the default powers given to trustees by the Trustee Act 2000,Footnote 125 so that the settlor could choose to rule out that authorisation mechanism if he were not happy with it and change it to something more suitable (or nothing at all). Or, if that were thought too aggressive a change to the current law, the default could be made ‘opt-in’, making it easier for those creating fiduciary relationships to choose to include an authorisation mechanism but not requiring them to take any action if they do not wish to take advantage of the default mechanism.
Again, it is beyond the province of an article such as this to determine which (if any) of those two proposals should be pursued. Neither is necessary if the court procedure is already sufficiently streamlined that there is no cause for concern. And, if some amendment is necessary, the choice between an ‘opt-in’ and an ‘opt-out’ default authorisation mechanism can only sensibly be made on the basis of knowledge about the current norms in well-drafted fiduciary documentation: if authorisation mechanisms are not commonly included at present then there is little ground for including them as an ‘opt-out’ (and hence standard) default, whereas if they are already commonplace in well-drafted documents then an ‘opt-out’ default makes more sense so that parties who are not well advised (or not professionally advised at all) still get the benefit of the common practice. It is difficult to determine the prevalence of authorisation mechanisms across the breadth of possible fiduciary relationships. Company directors now have available to them a statutory mechanism for obtaining authorisation from the non-conflicted directors, which is opt-in for public companies but opt-out for private companies.Footnote 126 Professional charging clauses are routinely included in trusts,Footnote 127 and the Standard Provisions of the Society of Trust and Estate Practitioners contain mechanisms for obtaining authorisation from independent trustees for fiduciary conflicts.Footnote 128 Numerous other authorisation clauses can be found in precedent books.Footnote 129 However, the mere existence of such precedents does not indicate the prevalence (or otherwise) of their use.
If the procedure for acquiring court sanction for fiduciary conflicts is considered insufficiently streamlined as a mechanism for getting it, then the suggestions above as to how it could potentially be improved upon can be pursued. If, on the other hand, the court procedure is adequate at present then there is no case for changing the law: if a fiduciary had adequate opportunities to get authorisation but chose not to avail himself of those opportunities, then the law is rightly sceptical about attempts at ex post facto justification. All too often, “secrecy is the badge of fraud”.Footnote 130 Furthermore, the fact that the fiduciary might not have recognised the existence of the conflict ought not to be a reason for avoiding liability because, again, that generates incentives for the fiduciary not to know his duty and not to consider on a regular basis whether he has any interests in conflict with it. “Trustees are to be kept by courts of equity up to their duty.”Footnote 131
Whichever view one holds as to the fitness for purpose of the various authorisation mechanisms presently available, it is better to focus attention on that question, rather than on the solution mooted by the judges in Murad v. Al-Saraj and Strother. Maintaining the fullness of a fiduciary's obligation to account for all profits that have been made in breach of fiduciary duty encourages fiduciaries to regularise transactions that would otherwise fall foul of the fiduciary conflict principle by obtaining authorisation. Such authorisation can come in the form of authorisation in the trust instrument ex ante, or be obtained from the principal, either ex ante or ex post (following full disclosure of all material information), or be obtained from the court (again, following full disclosure of all material informationFootnote 132). Court approval is best sought ex ante as that is more consistent with the incentive structure that fiduciary doctrine has sought to generate. The alternative approach encourages fiduciaries to ‘chance it’, on the basis that part of the profit they make from the infringing transaction might be able to be kept if the court is so minded. That sort of attitude runs directly counter to the attitude that fiduciary doctrine seeks to instil in fiduciaries.
It is better to ensure that the law has in place robust systems for getting authorisation ex ante in appropriate cases than it is to give fiduciaries the hope of readily reducing their liability to account ex post facto. This may not avoid every single hard case, but that is the price for the protection that fiduciary doctrine provides in all other cases. That protection would be substantially undermined were the law to allow fiduciaries to think that they do not need proper authorisation provided they believe that they are acting properly.
V. Conclusions
Orthodox fiduciary doctrine holds that a fiduciary who has made a profit by acting in a situation involving conflict between duty and interest must account to his principal for that profit if it was not duly authorised. That accounting obligation is strict, or full, in the sense that the fiduciary must account for all of the profit that was made in breach of fiduciary duty. This article has addressed suggestions, raised recently by judges in England and Canada, that the quality of that accounting obligation should be changed by introducing a judicial discretion to control the amount of the profit for which a fiduciary must account.
It has been argued that adoption of a remedial discretion of that sort would be ill-advised because it would undermine the deterrence that the account of profits represents for fiduciaries. Fiduciary doctrine is designed to provide prophylactic and subsidiary protection to non-fiduciary duties by encouraging fiduciaries to eschew situations that involve temptations which are inconsistent with the proper performance of those non-fiduciary duties. It would, therefore, be a mistake to allow fiduciaries to hold out hope of retaining some of their unauthorised profits, because that sort of hope is itself the sort of temptation against which fiduciary doctrine is designed to strike. It has been seen that there is a small cost to society in this form of protection, in the sense that some valuable transactions are prohibited to fiduciaries. But that small cost is offset by the benefit provided by fiduciary doctrine's protection of non-fiduciary duties.
Furthermore, any assessment of the cost that fiduciary doctrine generates for society as a whole must take into account the possibility for the fiduciary to regularise the conflict situation by getting due authorisation. Such authorisation can be obtained by the fiduciary prospectively at the outset, in the documentation which constitutes the fiduciary relationship, and where that has not been done it can be obtained from the fiduciary's principal(s). Importantly, however, it has also been seen that even if authorisation cannot realistically be sought from the principal, there is a judicial jurisdiction, albeit one exercised sparingly, to authorise conduct that would otherwise constitute a breach of fiduciary duty. That is certainly so for trustees seeking remuneration for work done on behalf of the trust, but there appears to be a broader jurisdiction to authorise conduct by fiduciaries generally (irrespective of whether there is a trust) that would otherwise constitute a fiduciary breach.
This judicial power to sanction fiduciary conflicts is not a wide-ranging remedial discretion of the sort argued for by Arden and Jonathan Parker L.JJ. in Murad and by McLachlin C.J. in Strother. It is preferable for fiduciaries to understand that courts can authorise conflicts, especially where that authorisation is sought ex ante, but that if the court will not authorise the conflict then there is a strict obligation to account for any and all profit that is generated as a result of the conflict: it would subvert the incentive structure of fiduciary doctrine if fiduciaries were encouraged to think that they can make a profit in breach of fiduciary duty and then proceed to court (if caught) to argue about how much of it they ought to be able to keep. If fiduciaries desire a more nuanced splitting of profits between themselves and their principals they ought to be encouraged (as the current doctrine does) to bargain for that directly with their principals, with full disclosure of all material facts, rather than expecting the court to impose its own view of an appropriate bargain on the parties to the fiduciary relationship. The suggestions to the contrary contained in Murad and Strother should be rejected.
